As 4:20 PM on April 20th approaches once again, cannabis-inclined investors are sure to be discussing their favorite strains and their favorite stocks. For the uninitiated, 420 is a widely-used slang term for the usage of cannabis products, and while it may be a good time to light up, now might not be the best time to buy marijuana stocks. That's because the industry is still young and the legal status at the federal level and in many states is still tenuous. Trends show that the tide is turning toward widespread legality and acceptance, but that still has not arrived on a large scale. Indeed, some high flyers in 2018 and 2019 have seen their share prices slump into 2020.

Key Takeaways

  • Legalized marijuana promises to be a big business as consumers are able to purchase pot products for medical and recreational use.
  • Canada has fully legalized pot, and several states in the U.S. have either legalized or decriminalized its possession.
  • While the industry could take off as legalization spreads, the industry is still quite young and showing some growing pains.

State of the Marijuana Sector

Most of the major U.S.-listed stocks in this space are Canadian, as Canada has fully legalized recreational marijuana use throughout the country in 2018. Though many U.S. states have also legalized recreational use, it remains illegal according to U.S. federal law.

The four key stocks highlighted in this article are virtually household names (at least among cannabis investors) though not all have done well in recent months. Most notably, Tilray (TLRY) has sputtered rather miserably after its massive post-IPO surge last year. Others, like Canopy Growth (CGC) and Cronos Group (CRON), have generally been buoyed by major brand-name backing (Constellation Brands and Altria Group, respectively).

Overall, the longer-term future of the industry actually appears positive as the inevitable consolidations and acquisitions shake-out the weaker players and help build much larger, stronger cannabis companies. However, that does not mean now is necessarily a good time to buy those stocks. Overall, both fundamentals and technicals appear weak for many of the bigger names.

Tilray Inc.

The volatility of the cannabis industry can clearly be seen in the roller-coaster swings Tilray's stock has experienced since its July 2018 IPO (the first pure cannabis play to debut on Nasdaq). Since that time, TLRY has risen by more than 300%, at one point shooting up to a high of exactly $300 in September before crashing back down. From there, the stock price has continued to decline, hitting the all the way to $16.50 as of the end of February 2020 - an almost 95% collapse in the stock's price.

A Canadian cannabis company, Tilray is backed by its largest shareholder, Privateer Holdings, which in turn has backing from billionaire investor Peter Thiel's fund. Late last year, Tilray became the first Canadian company to export medical marijuana legally to the U.S. for a clinical trial.

Fundamental Analysis

From a fundamental perspective, Tilray is not looking healthy. It's trailing twelve-month return on equity (a key profitability metric) is around -70%, operating margins are deep in the red, and its earnings per share growth this year is worse than -800%.

Chart of Tilray, Inc. (TLRY)

Technical Analysis

The technical picture doesn't look much better. TLRY stock continues to trend lower since last September's short-lived spike, and price continues to trade well under its 50-day moving average. Perhaps the only potentially positive aspect of this stock is the fact that it's now cheaper than it was in August of last year, shortly after its IPO. But that's not really a great reason to buy a stock. While TLRY is definitely one of the key cannabis stocks to watch, it's probably not the best time to buy, at least until more positive stock catalysts enter the picture.

Canopy Growth

Canopy Growth Corporation is also a Canadian company and has the largest market capitalization of any stock on our list at nearly $10 billion (almost a large-cap stock). The company has recently been awash in cash thanks to a huge investment from Constellation Brands (STZ), a major international producer of beer, wine, and spirits. Canopy owns and operates many different brands, and produces and markets both medical and recreational strains of marijuana. The stock however has floundered since its April 2019 highs just under $50. As of February 2020, CGC shares trade at under $20 a piece.

Fundamental Analysis

Fundamentally, Canopy Growth shows a much more compelling picture than Tilray. Most notably, Canopy's recent quarterly earnings growth year-over-year is over 4000%. And quarterly revenue growth (YoY) is well over 200%. Return on equity is negative, but not even close to the dismal number from Tilray.

Chart of Canopy Growth (CGC)

Technical Analysis

These more positive numbers have shown up in CGC's stock trajectory. While there has been much volatility for the past few years, the stock has been on a general uptrend for quite some time and has spent most of its history above its key 200-day moving average.

As the world's largest cannabis company, Canopy Growth has a lot going for it, at least as far as cannabis companies go. This is especially the case after the large cash infusion from Constellation Brands, a giant in the alcoholic beverage industry. The company has also acquired or partnered with diverse companies across the globe that are likely to help fuel Canopy Growth's expansion ahead of its competitors.

Cronos Group

Late last year, Altria Group (MO), the tobacco giant that makes Marlboro cigarettes, announced its intent to acquire a major stake in Cronos Group (yet another Canadian company). As a result, Cronos’ stock received a big boost. Shortly after that, Altria acquired a major stake in JUUL Labs, a fast-growing e-cigarette maker.

Cronos Group is a Toronto-based producer of medical marijuana. It ships its product internationally and is a leader in the marijuana/cannabis space. The company actively invests in medical marijuana companies, usually based in Canada. CRON shares hit a high of around $22 early in 2019, but a year later the share price has dropped to just $6.

Fundamental Analysis

From a revenue perspective, Cronos' recent quarterly sales growth (YoY) was nearly +250%. Like the other pot stocks on our list, however, profitability is still significantly negative – return on equity is around -13%.

Chart of Cronos Group. (CRON)

Technical Analysis

Like Canopy Growth's chart, Cronos' price action shows a good deal of volatility with an overall bullish trend for the past couple of years. But since early March, the stock has been correcting pretty sharply, well under its 50-day moving average. Still, CRON remains in a strong uptrend on a longer-term time frame, and some investors may see this as a potential opportunity to buy the (big) dip. Of course, an investor who does so risks attempting to catch a "falling knife".

Aurora Cannabis

The final Canadian cannabis company on our list is Aurora Cannabis (ACB). It's the second-largest company listed here, after Canopy Growth. Aurora is among the fastest-growing companies in this space, fueling its growth primarily through strategic acquisitions.

Notably, Aurora recently announced that it would acquire Farmacias Magistrales SA, Mexico’s first federally licensed importer of raw materials containing THC, the psychoactive ingredient in cannabis. This buyout provides Aurora with the strongest link among all major cannabis companies to Latin America's booming medical marijuana market. In Q1 of 2019 ACB shares were just under $10, but as of end of February 2020 they have sank to only $1.50 a share.

Fundamental Analysis

Aurora's recent quarterly revenue growth (YoY) was high, around +360%. And profitability, though also negative like the other cannabis companies, is only mildly negative – return on equity is around -3%.

Chart of Aurora Cannabis (ACB)

Technical Analysis

As for the technicals, the price chart of Aurora Cannabis shows a great deal of volatility and no discernible long-term trend. There were big highs in January and October of 2018, interspersed with drops into penny stock territory (under $5 per share). Overall, this stock may appeal to shorter-term traders who like to play the swings.

Long- and medium-term investors may be spooked by the volatility that is inherent in cannabis plays right now and for the foreseeable future. Generally-speaking, fundamentals, and technicals both remain weak for many of the stocks in this space. That should be reason enough to just say 'no', at least for now.

The Bottom Line

The legal marijuana industry looks promising - with billions of potential revenue dollars waiting to be poured in to growers and purveyors of marijuana and CBD products. Still, the industry is new as a legal enterprise, and so it is experiencing some growing pains, with stock prices slumping into 2020. Keep an eye out though, as waiting for the right moment could pay off.